THK (6481) FY2026 Q2 Earnings Report

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Executive Summary

Revenue and profit both increased substantially in Q2, although it should be noted that the growth in net income includes the one-time factor of profit recognized from discontinued operations. Revenue was ¥1,510.7B (+32.4% YoY), operating income was ¥224.8B (+268.9%), and profit before tax was ¥220.9B (+221.7%). Consolidated net income was ¥338.4B (+751.3%), of which net income attributable to owners of the parent was ¥337.4B (+805.3%). Of this amount, ¥154.96B was profit from discontinued operations, while profit from continuing operations alone was ¥183.41B (+335.1%). The primary drivers of the earnings increase were improved profitability in the Japan and China segments, with the operating margin expanding significantly to 14.9% from 5.3% in the previous year.

Factors Affecting Earnings Performance

【Revenue】Revenue was ¥1,510.7B, up +32.4% YoY. Segment revenue (composition ratio relative to total segment revenue of ¥1,928.7B) consisted of Japan at ¥633.5B (32.9% composition ratio, +18.8% YoY), China at ¥499.2B (25.9%, +40.9%), the Americas at ¥449.2B (23.3%, +2.4%), and Europe at ¥346.8B (18.0%, +2.4%). Growth in China and Japan drove the overall increase in revenue. Growth in the Americas and Europe remained within a broadly flat range.

【Profit and Loss】Operating income was ¥224.8B (+268.9% YoY), and the operating margin improved substantially to 14.9% from 5.3% in the previous year, an improvement of +9.6pt. The cost of sales ratio declined YoY, resulting in a gross margin of 34.3% (+4.6pt YoY), while the SG&A ratio was 19.2% (▲0.2pt YoY). SG&A growth was contained relative to revenue growth, resulting in positive operating leverage. By segment, operating income in Japan of ¥271.6B (42.9% margin) led company-wide profit, while China improved to ¥83.2B (16.7% margin, +92.0% YoY). The Americas remained low-margin at ¥5.3B (1.2% margin, ▲15.0% YoY), while Europe remained in the red at ▲¥2.9B, although the deficit narrowed by +61.3% YoY. Against total segment profit of ¥357.2B, company-wide operating income was ¥224.8B; the difference is believed to result from intersegment adjustments, including company-wide common expenses. The substantial excess of consolidated net income of ¥338.4B over profit before tax of ¥220.9B was primarily due to the recognition of ¥154.96B in profit from discontinued operations. Revenue and profit both increased.

Segment Analysis

Japan was the largest driver of both revenue and profit, with an operating margin of 42.9%, significantly above the company-wide average of 14.9%. China achieved simultaneous growth and profitability improvement, with revenue up +40.9% and operating income up +92.0%, raising its margin to 16.7%. In the Americas, revenue growth was limited to +2.4%, while operating income declined by ▲15.0%, reducing the margin to 1.2% and leaving profitability inferior to that of other regions. Europe remained in an operating loss position, although the loss narrowed by +61.3% YoY (▲¥7.5B → ▲¥2.9B). Company-wide operating income of ¥224.8B was below total segment profit of ¥357.2B, indicating that regional profitability disparities were a factor weighing down the company-wide margin.

Key Financial Metrics

【Profitability】The operating margin improved to 14.9% from 5.3% in the previous year, an improvement of +9.6pt, while the net profit margin attributable to owners of the parent expanded to 22.3% (3.3% in the previous year). However, the increase in the net profit margin includes the contribution from profit from discontinued operations of ¥154.96B, and the margin based on continuing operations alone was equivalent to 12.1%. 【Cash Quality】Operating Cash Flow (OCF) of ¥188.7B was only 0.56 times net income attributable to owners of the parent of ¥337.4B, as increases in trade receivables and inventories delayed cash conversion. 【Investment Efficiency】The total asset turnover ratio was 0.31 times on a semiannual basis, while total assets were ¥4,806.0B, representing a moderate increase of +1.6% YoY. ROE was 12.3%, primarily due to the substantial improvement in the net profit margin, while financial leverage declined slightly from the previous year to 1.74 times. 【Financial Soundness】The equity ratio improved to 57.4% (+2.1pt from 55.3% in the previous year). Total interest-bearing debt was ¥1,398.1B, and the interest-bearing debt-to-equity ratio was 0.51 times. Interest coverage based on operating income was approximately 14.1 times, indicating ample capacity to meet interest payments.

Cash Flow Analysis

Operating Cash Flow was ¥188.7B, down ▲7.1% YoY. OCF before changes in working capital was ¥231.1B, but increases in inventories (▲¥33.6B) and income taxes paid (▲¥41.9B) were negative factors, while an increase in trade payables (+¥45.1B) partially offset them. Investing Cash Flow was ▲¥236.6B, of which capital expenditures accounted for ¥86.8B; the amount also included investments in other securities and similar assets. Financing Cash Flow was ▲¥34.6B. Dividend payments of ¥137.6B were the primary cash outflow, while a certain amount of financing was obtained through short-term borrowings and other sources. As a result, free cash flow (OCF + investing cash flow) was ▲¥47.9B, a deficit exceeding the amount of dividends paid. Cash and cash equivalents were ¥1,169.2B, with the funding shortfall for the period covered by available liquidity.

Earnings Quality

Of consolidated net income of ¥338.4B, profit from continuing operations accounted for ¥183.41B, while profit from discontinued operations accounted for ¥154.96B, equivalent to 45.8% of total net income. Since the gain or loss from discontinued operations in the same period of the previous year was nearly zero (▲¥2.4B), part of the sharp increase in net income for the current period was attributable to non-recurring factors. Accordingly, underlying earnings power should appropriately be assessed based on profit from continuing operations (+335.1% YoY). Non-operating income and expenses were limited in scale, comprising financial income of ¥12.1B, financial expenses of ¥16.0B, and equity-method losses of ▲¥1.7B. Most of the recurring earnings improvement resulted from the operating level, including improvements in the gross margin and SG&A ratio. Comprehensive income was ¥303.6B, including ¥301.5B attributable to owners of the parent. The difference from net income attributable to owners of the parent of ¥337.4B was ▲¥35.9B, primarily due to negative other comprehensive income, including foreign currency translation adjustments.

Earnings Forecast and Guidance

The full-year earnings forecast is revenue of ¥3,100B, operating income of ¥480B (+232.5% YoY), net income attributable to owners of the parent of ¥548B, EPS of ¥488.97, and dividends of ¥195. The company announced revisions to its earnings and dividend forecasts during the current quarter. Based on first-half results, progress rates were 48.7% for revenue (¥1,510.7B/¥3,100B), 46.8% for operating income (¥224.8B/¥480B), and 61.6% for net income attributable to owners of the parent (¥337.4B/¥548B). The higher progress rate for net income than for revenue and operating income was primarily due to the substantial contribution from profit from discontinued operations recognized in the first half. The pace of progress in the second half should therefore be assessed based on operating-level results.

Shareholder Returns

The dividend policy targets an equity dividend rate (DOE) of 8%. The company announced a revision to the interim dividend to ¥96 and the full-year dividend forecast to ¥195 (+58.5% from the previous year's actual dividend of ¥123). The payout ratio is calculated at approximately 39.9% by dividing the forecast dividend of ¥195 by forecast EPS of ¥488.97. Share repurchases were minimal at ▲¥0.0B during the period, and shareholder returns were centered on dividends. Meanwhile, free cash flow for the period was ▲¥47.9B, indicating that dividend payments of ¥137.6B were not covered by internally generated funds. The sustainability of shareholder returns will therefore depend on a future recovery in cash generation.

Risk Factors

1. Earnings quality and cash conversion risk: Operating Cash Flow of ¥188.7B was only 0.56 times net income attributable to owners of the parent of ¥337.4B, while increases in trade receivables and inventories delayed cash conversion. Free cash flow was ▲¥47.9B, indicating that dividends were not covered by internally generated funds.

2. Regional profitability disparity risk: The operating margin in the Americas was 1.2% (▲15.0% YoY), while Europe remained loss-making at ▲0.8%. The substantial profitability gap relative to Japan (42.9%) and China (16.7%) is a factor weighing down the company-wide margin.

3. Dependence on one-time gains: Of consolidated net income of ¥338.4B, ¥154.96B (45.8% composition ratio) was profit from discontinued operations, creating a substantial gap from profit from continuing operations of ¥183.41B.

Industry Benchmark (Reference; Compiled by the Company)

Industry Benchmark (manufacturing)

Profitability and Returns

The company's profitability exceeds the industry median and is positioned toward the upper range.

Growth and Capital Efficiency

The revenue growth rate is substantially above the industry median and represents a high growth rate within the industry.

※Source: Compiled by the Company

Key Points from the Earnings Results

1. The operating margin improved by +9.6pt YoY, driven by both an increase in the gross margin and the containment of SG&A expenses. This appears to reflect structural improvement resulting from changes in the pricing and cost structure.

2. The increase in consolidated net income of ¥338.4B (+751.3%) benefited substantially from profit from discontinued operations of ¥154.96B. The difference from profit based on continuing operations (¥183.41B, +335.1%) is an important reference point when assessing the future sustainability of EPS.

3. The fact that OCF remained at only 0.56 times net income and free cash flow was negative indicates that trends in working capital (trade receivables and inventories) and the progression of cash conversion will be key areas of focus going forward.

Theoretical Share Price (Reference Value)

This is a reference range mechanically calculated solely from publicly disclosed data using a residual income model (Ohlson-type model with an explicit five-year fade). It is not a forecast of the market share price or a recommendation of any specific investment action.

Sensitivity: ¥3,323–¥3,521 at ±1% for the cost of equity, and ¥3,395–¥3,457 at ±0.1 for ω.

Notes:

• Because progress toward full-year forecast net income (62%) exceeds the standard level (50%), forecast EPS has been adjusted upward within a maximum range of +10% (because companies whose progress is ahead of schedule tend to outperform forecasts; the adjustment may be excessive for businesses with strong seasonality).
• Net assets as of the quarter-end are used (there is a timing difference relative to the full-year forecast).

(Calculation model: Residual Income Model / Interest Rate Base Month: 2026-07 / This value does not forecast or guarantee future share prices)

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This report is an earnings analysis document automatically generated by AI based on XBRL earnings summary data. It does not recommend investment in any specific security. The industry benchmarks are reference information compiled by the Company based on publicly disclosed earnings data. Investment decisions should be made at your own responsibility, after consulting professionals as necessary.

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AI Financial Analysis

Executive Summary

THK delivered a strong first-half FY2026 operating recovery, although reported net income is materially lifted by discontinued operations and cash conversion weakened. Revenue increased 32.4% year on year to ¥151.1bn. Operating income rose 268.9% to ¥22.5bn, substantially outpacing sales growth. The operating margin expanded to 14.9% from 5.3% a year earlier, a 960bp improvement. Gross margin reached 34.3%, versus 29.7% in the prior period, representing a 460bp expansion. This indicates that the earnings recovery was driven not only by higher volume but also by materially improved gross-profit conversion. SG&A rose 5.8% to ¥28.9bn, far below revenue growth, producing strong operating leverage. Profit before tax increased 221.7% to ¥22.1bn. Net income attributable to owners rose 805.3% to ¥33.7bn, equivalent to a 22.3% net margin. However, continuing-operations profit was ¥18.3bn while discontinued-operations profit was ¥15.5bn, so nearly half of reported net income came from discontinued operations. Accordingly, the headline net-margin and ROE performance should not be treated as fully recurring. The effective tax rate was 17.0%, and the tax burden above 1.0 reflects the discontinued-operation presentation rather than ordinary tax economics. Operating cash flow was ¥18.9bn, only 0.56x reported net income, falling below the 0.8x quality threshold. The principal cash-flow headwind was a ¥13.9bn increase in receivables, supplemented by a ¥3.4bn inventory increase. Free cash flow was negative ¥4.8bn after ¥8.7bn of capital expenditure. Balance-sheet liquidity remains solid, supported by ¥116.9bn of cash and a 57.4% equity ratio. Full-year guidance implies first-half revenue progress of 48.7% and operating-income progress of 46.8%, both close to a normal 50% first-half run rate. In contrast, net-income progress is 61.6% of full-year guidance, reinforcing that the interim earnings mix includes a non-core contribution. The revised dividend policy targets an 8% dividend on equity ratio (DOE), providing a relatively stable shareholder-return framework but making cash conversion and equity preservation important monitoring items.

Profitability Analysis

Annualized DuPont ROE is 24.4%, decomposed into a 22.3% net profit margin, 0.629x asset turnover, and 1.74x financial leverage. The dominant driver of the reported ROE is the exceptionally high net margin, rather than aggressive balance-sheet leverage. Financial leverage is moderate and the debt-to-equity ratio of 0.74x remains below the 1.0x conservative benchmark. Asset turnover is reasonable for a capital-intensive linear-motion and industrial-components manufacturer, with PPE accounting for 34.1% of assets. The sharpest operational improvement was the operating-margin expansion of 960bp to 14.9%, approaching the 15% excellent-performance threshold. Gross-margin expansion of 460bp explains a substantial portion of this operating improvement. SG&A growth of only 5.8%, versus 32.4% revenue growth, added a further favorable operating-leverage effect. Net income is less representative of recurring profitability because ¥15.5bn of discontinued-operations profit supplements ¥18.3bn of continuing-operations profit. Finance costs of ¥1.6bn exceeded finance income of ¥1.2bn, but the interest burden remained high at 0.983, indicating only limited earnings dilution below operating income. Equity-method investment income was negative ¥1.7bn and was not a material contributor to profitability. The 3.1% accruals ratio is within the high-quality benchmark, but this does not offset the weaker cash realization of earnings in the period. Sustaining the higher gross margin and keeping SG&A growth below sales growth are central to preserving the operating recovery.

Growth Assessment

Sales growth of 32.4% and operating-income growth of 268.9% demonstrate a substantial recovery in underlying demand and/or production profitability. The widening gross margin indicates improved manufacturing economics rather than a purely revenue-led expansion. Inventory increased to ¥70.5bn from ¥65.2bn, while receivables rose to ¥74.2bn from ¥63.5bn. These balance-sheet movements are consistent with a higher-sales environment, but their scale reduces near-term cash conversion. Full-year sales guidance is ¥310.0bn, and first-half progress of 48.7% is only 1.3 percentage points below the standard 50% first-half benchmark. Operating-income progress is 46.8%, 3.2 percentage points below the standard benchmark, implying that management expects a modestly stronger second half. Full-year operating margin implied by guidance is 15.5%, slightly above the 14.9% first-half margin, so the outlook requires continued margin improvement. Full-year net-income guidance of ¥54.8bn has already been reached by 61.6% in the first half, but this apparent outperformance is not directly comparable because interim net income includes discontinued-operations profit. The business outlook should therefore be assessed primarily through revenue, operating income, gross margin, and working-capital discipline rather than headline net-income progress. The company has revised its forecast, making execution against the implied second-half operating-profit acceleration an important marker.

Financial Health

Financial health is sound overall, with total equity of ¥276.0bn and an equity ratio of 57.4%, up from 55.3% a year earlier. The current ratio is approximately 2.61x, based on current assets of ¥277.7bn and current liabilities of ¥106.5bn, well above the 1.0x warning level. Cash and equivalents of ¥116.9bn provide substantial immediate liquidity. Current assets also exceed short-term bonds and borrowings of ¥60.0bn by a wide margin, limiting maturity-mismatch risk. Non-current bonds and borrowings were ¥79.8bn, and total reported borrowings were approximately ¥139.8bn. The reported debt-to-equity ratio of 0.74x is below the aggressive-financing threshold of 2.0x. Short-term borrowings increased to ¥60.0bn from ¥33.2bn, while non-current borrowings declined to ¥79.8bn from ¥90.0bn; this increases refinancing sensitivity at the current-maturity end despite ample liquidity. Total liabilities were broadly stable year on year at ¥204.6bn. Retained earnings increased ¥19.8bn, or 15.4%, to ¥148.5bn, supporting internal capital formation. Treasury stock was ¥22.3bn, equal to 4.6% of total assets, and share repurchases in the current period were negligible. Other financial assets totaled ¥26.7bn across current and non-current classifications, providing additional financial flexibility. Other comprehensive income was negative ¥3.5bn, primarily reflecting ¥4.9bn of foreign-currency translation losses; this illustrates continuing exposure of equity to currency movements. PPE of ¥164.1bn, or 34.1% of assets, confirms a meaningful fixed-asset base that requires disciplined utilization and capital allocation.

Notable B/S Changes

Short-term bonds and borrowings: +¥26.8bn (+80.7%) to ¥60.0bn — materially higher current-maturity funding increases refinancing sensitivity, although liquidity remains ample. Non-current bonds and borrowings: -¥10.2bn (-11.3%) to ¥79.8bn — partly offsets the rise in short-term borrowings and indicates a more current-weighted debt profile. Retained earnings: +¥19.8bn (+15.4%) to ¥148.5bn — earnings accumulation supports capital strength and the DOE-based dividend framework. Accounts receivable: +¥10.7bn (+16.9%) to ¥74.2bn — receivable growth was the largest operating-cash-flow drag and is consistent with the 90-day annualized DSO alert. Inventories: +¥5.3bn (+8.1%) to ¥70.5bn — inventory investment contributed to negative free cash flow; the 130-day annualized DIO requires close monitoring. Property, plant and equipment: +¥1.2bn (+0.7%) to ¥164.1bn — the production asset base remains substantial at 34.1% of total assets, while first-half capex of ¥8.7bn indicates ongoing investment.

Cash Flow Quality

Cash-flow quality is the principal near-term financial concern. Operating cash flow was ¥18.9bn against net income attributable to owners of ¥33.7bn, producing an OCF/net-income ratio of 0.56x and triggering the earnings-quality alert. The divergence is amplified by the ¥15.5bn discontinued-operations profit included in net income, but operating cash conversion was still constrained by working-capital outflows. Receivables consumed ¥13.9bn of cash, the largest operating-cash-flow headwind. Inventories consumed a further ¥3.4bn of cash. Payables provided ¥4.5bn of funding, only partly offsetting those uses. Annualized DSO of 90 days exceeds the 60-day warning threshold, indicating slow collections or a more back-end-loaded sales and billing profile. Annualized DIO of 130 days exceeds both the 90-day warning threshold and the 60-day manufacturing efficiency benchmark, indicating elevated stockholding and potential demand, mix, or production-planning risk. The annualized cash conversion cycle of 178 days is above the 120-day warning level and ties up material capital in the operating cycle. These alerts are especially important for a manufacturer because inventory can become vulnerable to obsolescence or require margin concessions if end-market demand weakens. The accruals ratio of 3.1% remains within the favorable sub-5% benchmark, so the issue is principally working-capital absorption rather than an unusually high level of accounting accruals. Capital expenditure was ¥8.7bn, or 5.7% of first-half revenue, within the typical 3-8% manufacturing range. Free cash flow was negative ¥4.8bn, as operating cash flow did not fully cover capital expenditure. Investing cash flow was negative ¥23.7bn, substantially larger than capital expenditure, reflecting additional investing uses that reduced cash generation. After ¥13.8bn of dividends, financing and investment demands resulted in a ¥3.6bn net cash decrease; favorable exchange-rate effects of ¥4.6bn partly supported the closing cash balance.

Dividend Sustainability

The interim dividend is ¥96 per share. Based on interim EPS of ¥301.18, the calculated interim payout ratio is 33.9%, a moderate level below the 60% sustainability benchmark. The full-year dividend forecast is ¥195 per share, which corresponds to an approximately 39.9% payout ratio against full-year EPS guidance of ¥488.97. The company has revised its dividend outlook under an 8% DOE policy, which links distributions to the equity base rather than solely to annual earnings. This policy can provide payout stability across a cycle, but it also means distributions may remain elevated when free cash flow temporarily weakens. First-half dividends paid totaled ¥13.8bn, while free cash flow was negative ¥4.8bn; FCF coverage was therefore negative 0.42x. Operating cash flow of ¥18.9bn did cover cash dividends of ¥13.8bn, but it did not cover dividends and capital expenditure combined. Cash and equivalents of ¥116.9bn and the strong equity ratio provide capacity to absorb this interim free-cash-flow deficit. Buybacks were immaterial at ¥0.02bn, so the total return ratio is effectively the dividend payout ratio in this period. Dividend sustainability will depend on conversion of receivables and inventories back into operating cash flow, as well as maintenance of the improved operating margin.

Risk Assessment

Business risks include Working-capital risk is high: annualized DSO of 90 days, DIO of 130 days, and a 178-day cash conversion cycle all exceed manufacturing warning thresholds. The immediate impact is lower cash conversion, while a demand slowdown could raise inventory obsolescence and discounting risk., The 32.4% revenue rebound and 460bp gross-margin improvement create sensitivity to industrial-cycle normalization. A reversal in demand, utilization, pricing, or product mix could pressure the 14.9% operating margin., Foreign-currency exposure remains relevant: foreign-currency translation reduced other comprehensive income by ¥4.9bn. Currency shifts can affect overseas earnings translation, competitiveness, and equity., As a manufacturer of linear-motion systems and industrial components, THK is exposed to capital-expenditure cycles in machinery, factory automation, transportation equipment, and electronics-related end markets. Customer inventory corrections or delayed equipment investment could affect order intake and factory utilization..

Financial risks include OCF/net income of 0.56x is below the 0.8x alert threshold. The root cause is substantial receivables and inventory investment together with a reported profit mix that includes discontinued operations; the impact is weaker self-funding capacity., Free cash flow was negative ¥4.8bn and did not cover ¥13.8bn of dividends. Liquidity currently mitigates the risk, but sustained negative free cash flow would make the DOE-based distribution policy more cash-demanding., Short-term bonds and borrowings rose to ¥60.0bn from ¥33.2bn. Although current assets of ¥277.7bn provide substantial coverage, the maturity profile requires continued access to funding markets and internal cash generation., Reported net income contains ¥15.5bn of discontinued-operations profit. This elevates the risk that headline EPS, net margin, ROE, and payout capacity overstate the recurring earnings base..

Key concerns include Priority 1: normalize working capital, particularly collections and inventory levels, to restore operating-cash-flow conversion., Priority 2: demonstrate that the first-half gross-margin and SG&A leverage gains can be sustained into the second half, as full-year guidance implies a 15.5% operating margin., Priority 3: distinguish continuing operational earnings from discontinued-operations gains when evaluating profitability and shareholder-return capacity., Priority 4: monitor the increased short-term borrowing balance alongside investment cash outflows and the revised DOE-based dividend commitment..

Investment Implications

Key takeaways include Revenue of ¥151.1bn and operating income of ¥22.5bn reflect a strong first-half operating recovery, with operating margin rising 960bp year on year to 14.9%., The favorable earnings leverage is supported by a 460bp gross-margin expansion and SG&A growth of 5.8%, well below the 32.4% increase in revenue., Reported net income of ¥33.7bn is not fully recurring because discontinued operations contributed ¥15.5bn of profit., Liquidity and capitalization are robust, with a 2.61x current ratio, ¥116.9bn of cash, a 57.4% equity ratio, and reported D/E of 0.74x., Cash conversion is the critical offset to operating strength: OCF/net income was 0.56x, free cash flow was negative ¥4.8bn, and annualized CCC was 178 days., The ¥195 full-year DPS forecast implies an approximately 39.9% payout ratio on guidance and is supported by the 8% DOE policy, but future cash funding depends on working-capital release..

Metrics to watch include Operating margin versus the 15.5% full-year margin implied by guidance, Receivable days, inventory days, and the annualized cash conversion cycle, Operating cash flow and free cash flow relative to dividends and capital expenditure, Continuing-operations profit relative to reported net income, Second-half revenue and operating-income delivery versus ¥310.0bn and ¥48.0bn full-year guidance, Short-term borrowings and cash balance following investment outflows.

Regarding relative positioning, THK shows stronger-than-benchmark reported profitability, with a 14.9% operating margin near the 15% excellent threshold, a 22.3% net margin, and annualized ROE of 24.4%. Its balance sheet is conservatively positioned versus the D/E benchmark, but operating working-capital efficiency is materially weaker than manufacturing benchmarks, with DSO, DIO, and CCC all in warning territory. Relative performance should therefore be judged on the durability of operating-margin recovery and the restoration of cash conversion rather than on the unusually strong headline net-income growth.